Can the yen's depreciation force the Bank of Japan to "turn hawkish"? Investors have re-bet on rate hikes.

Investors expect that the decline of the yen will force the Bank of Japan to take a more hawkish stance, so they are shorting bonds, buying bank stocks, and preparing for the earliest interest rate hike which will take place next month. The USD/JPY exchange rate has reached 154, close to the intervention level, which could trigger a rate hike, and investors are becoming more cautious this time, unwilling to take on too much risk. They have already accumulated positions, especially in bank stocks that will benefit from rising interest rates. The market is closely watching as the last interest rate hike in Japan three and a half months ago, against the backdrop of a global rate cut frenzy, partly contributed to the chaotic surge of the yen, causing positions in the yen to be quickly closed out and affecting global markets. Shinji Ogawa, co-head of cash equity sales at JPMorgan in Tokyo, said, "There seems to be much higher attention and sensitivity around the Bank of Japan." "This is evident across various asset classes, whether it's in direct overnight index swap... (or) financials, which is an area where stock price fluctuations are quite dramatic." Traders say that some hedge funds are also betting on rising bond yields. Since late October, expectations for a 25 basis point rate hike in December in Japan have increased from negligible to around 54%. "Fast money is focusing again on the front end of the curve," said Keita Matsumoto, Head of Financial Institutions Sales and Solutions at Citigroup Global Markets in Japan, noting that hedge funds have accumulated a small number of short positions in recent weeks. In the two weeks since the U.S. election, Tokyo bank stocks have risen about 13%, while the overall market has remained largely flat, with export-related stocks also performing well, especially cyclical sectors such as industrial and machinery stocks. George Efstathopoulos, manager of a $102 million global multi-asset fund at Fidelity International, said, "We have been focusing on mid-cap and banking stocks in Japan, which will benefit from wage growth and rising interest rates, respectively." He added, "Lately, our view on large-cap Japanese stocks has also turned more bullish as the weak yen is expected to better profit prospects at a time when global economic growth is picking up again." The Yen Story The yen price is a major factor affecting the performance of the Japanese economy and stock market, and may influence monetary policy through import costs, which then could raise inflation. Bank of Japan Governor Kazuo Ueda mentioned only the yen in a closely watched policy speech on Monday. The yen has fallen over 30% against the dollar since the beginning of 2021. However, market participants believe that the continuously falling yen will prompt the Bank of Japan to take action sooner rather than later, especially as currency traders are betting the yen will further depreciate. Nathan Swami, Head of FX Trading in the Asia-Pacific region at Citigroup in Singapore, said, "Given the recent performance of the yen, the Bank of Japan may need to reassess whether it needs to take a tougher stance at future meetings." Data from the CFTC shows that FX speculators have been increasing their short bets on the yen. One thing that is certain is that there are not many bets in the interest rate market, as the over 375 basis points spread between the two-year U.S. and two-year Japanese rates is a strong fundamental factor for the yen's weakness, giving many investors confidence. Shafali Sachdev, Head of Asia Investment Services at BNP Paribas Wealth Management, said, "Given the interest rate differential and carry trades, many clients are eager to structurally long the U.S. dollar." Despite this, the sharp rise of the yen in August led to the Nikkei index recording its largest single-day drop since 1987, leaving a deep impression on investors. Geoff Yu, a strategist at a New York bank, said, "I think the yen is as important as the Japanese fundamentals." Matsumoto from Citigroup said that if the yen no longer eats into the dollar's returns, this could even be beneficial for foreign investors in Japan. He added, "Because global investors have to worry about where the yen depreciation may stop. So they are looking for the bottom of the yen."